Ensuring Transparency in Franchise Marketing Funds

Businesses preparing to franchise often plan joint promotions before putting arrangements in place to manage the money. If franchisees’ marketing contributions go into the business bank account without separate records, simple questions about how the money is spent can become a source of disputes. Before offering a franchise, establish marketing fund rules that can be scrutinised and explained. This transparency helps build trust across the franchise network from the outset.

1. Distinguish marketing funds from the franchisor’s income

This guide focuses on funds collected from franchisees to finance joint marketing, rather than how to set contribution levels. The first step is to explain the nature of each payment so franchisees do not assume that every fee they pay serves the same purpose.

Royalties and marketing contributions should not be treated as interchangeable terms. The agreement must distinguish payments for franchise rights and support from those allocated to specific marketing activities. Do not promise a dedicated fund if, in practice, the money can be used freely for the company’s general needs.

Also distinguish between three types of expenditure:

• Joint promotions for the brand or outlet network.
• Outlet launch promotions that primarily benefit one franchisee.
• Local promotions planned and paid for directly by the outlet operator.

For example, producing product photographs for use across all outlets is different from distributing leaflets around a single location. Decide from the outset which budget will cover each activity. This distinction prevents double charging and avoids the assumption that joint contributions automatically cover all local promotional needs.

2. Set out commitments in the disclosure documents and agreement

Indonesia specifically regulates franchising through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. It sets out the criteria for a franchise, including a business system, a business that has demonstrated profitability, recorded or registered intellectual property, and ongoing support from the franchisor.

The regulation also requires the franchise offering prospectus to be provided to prospective franchisees at least 14 calendar days before the agreement is signed. The franchise relationship is based on an agreement between parties of equal legal standing and is governed by Indonesian law.

The marketing fund rules in this guide are a proposed framework for contractual governance, not a statement that every franchise must establish a joint marketing fund. If your business chooses to collect these contributions, explain the obligation in the disclosure documents and set out consistent arrangements in the agreement.

These should cover, at a minimum:

• The purposes for which the fund may be used and the types of expenditure permitted.
• Who manages, approves and reports on expenditure.
• How fund administration costs are treated.
• The reporting schedule and how franchisees can request explanations.
• How unspent balances are treated.
• The procedure for changing the fund’s spending policy.

Avoid clauses that grant unrestricted discretion to change the purpose of the fund. Ask a legal adviser to assess whether these provisions are consistent with the agreement as a whole, particularly the parties’ rights and obligations.

3. Establish traceable records

Start with dedicated accounting codes for marketing contributions and expenditure. A separate bank account can help maintain control, but it is no substitute for orderly bookkeeping. Conversely, using a shared account requires sufficiently clear, separate records to prevent marketing transactions from becoming mixed up with ordinary operating costs.

For each item of expenditure, retain the activity proposal, approved budget, proof of purchase and evidence that the activity took place. Record who gave approval. Wherever possible, the person proposing expenditure should not also be the sole person approving it and checking the payment.

If work is awarded to a company owned by the founder or to a related party, disclose the relationship and document the reasons for choosing that supplier. Compare the scope of work and assess whether the quotation is reasonable. A close relationship must not replace an assessment of the benefits to the outlet network.

Prepare regular reports with a simple structure: opening balance, contributions received, expenditure by activity, outstanding payment commitments and closing balance. Keep budgeted figures separate from actual expenditure. Franchisees need to know not only how much money remains, but also how much has already been committed to future activities.

4. Explain the benefits without promising sales results

A joint fund will not necessarily deliver equal benefits to every location. A brand awareness campaign may affect new outlets, established outlets and areas with a smaller customer base differently. Explain the basis for selecting activities rather than promising identical benefits for everyone.

Use measures that match the campaign’s objectives. For a voucher-based promotion, for example, record voucher redemptions by outlet and the cost of running the promotion. Do not equate advertising reach with proven additional sales.

Provide a channel for questions, with a named person responsible and an agreed response time. If franchisees can propose activities, explain how proposals are assessed without suggesting that every decision requires unanimous approval.

Before collecting the first contribution, prepare a sample report using clearly labelled simulated transactions. Check whether the prospective fund administrator can trace every figure back to its supporting evidence.

Practical step: prepare the fund spending policy, agreement clauses and sample report as a single package. Do not start collecting contributions until all three are consistent and can be explained to prospective franchisees.